Updated: Digg this — Former social-sharing superstar reportedly sold for $500K

Updated: Maybe it was the BusinessWeek cover that sealed Digg’s fate. When the social-sharing site was near the height of its popularity in 2006, the business magazine put founder Kevin Rose on the cover with the caption: “How this kid made $60 million in 18 months.” That was the estimated value of the site at the time — based on some suspiciously bubble-like math — but it was also the point at which Digg started to decline, slowly at first and then more rapidly, followed by some disastrous redesigns and the departure of its founder. Today, New York-based incubator Betaworks announced that it has acquired the remaining assets of the company, and according to a report in the Wall Street Journal, the purchase price was just $500,000.

Update: While Betaworks may have paid $500,000 in cash for what was left of Digg, the total value of the company’s assets at the end of its life is apparently closer to $20 million, according to a number of reports. TechCrunch says that the Washington Post paid $12 million to acquire most of the development team, and LinkedIn paid between $3.75 million and $4 million for patents that the company had on some of its social features. The New York Times has also reported that part of the Betaworks deal was “single-digit millions” worth of equity in the incubator. Meanwhile, in an interview with the WSJ, Rose said Digg failed because “social media grew up,” and the Digg founder has also written about the acquisition on his Google+ page.

Betaworks, the incubator behind companies such as Bitly and Chartbeat, said in a blog post that it plans to merge the remaining assets of Digg with News.me — a Betaworks startup whose focus is news discovery, and was recently spun off as a separate entity under CEO Jake Levine. The core of Digg’s development team left in May to join WaPo Labs, the research arm of the Washington Post, and according to the Wall Street Journal report, CEO Matt Williams (who took over from Kevin Rose in 2010) will join Andreessen Horowitz as an entrepreneur-in-residence. Said the Betaworks post:

Digg is one of the great internet brands, and it has meant a great deal to millions of users over the years. It was a pioneer in community-driven news. We are turning Digg back into a startup… the News.me team will take Digg back to its essence: the best place to find, read and share the stories the internet is talking about.

In many ways, Digg was eclipsed by the whole social-networking phenomenon, which was just starting to build into a massive wave when Kevin Rose appeared on the BusinessWeek cover. Facebook had recently broken out of its university-only mode, and Twitter had begun to fulfill much of the link-sharing purpose that Digg and other communities such as Reddit originally had. In 2010, Digg launched an ambitious redesign aimed at adding more social and Twitter-style features, and it also added special tools for publishers in an attempt to get mainstream media sites to push their stories to Digg first. But those changes irritated most of the site’s hardcore users, and they turned on it.

An attempt to reinvent both Digg and News.me

The merger marks an attempt to reinvent News.me as well: the Betaworks startup — which recently launched a mobile app that it hoped would become “an Instagram for news” — was originally created as a partnership between Betaworks and developers at the New York Times, and later bought by Betaworks. Like Digg, the idea behind News.me was to use social behavior around link-sharing (as well as algorithms developed by Bitly to track the popularity of shortened links being shared on Twitter and elsewhere) to filter the news for users in a more social way. But the iPad app didn’t get much traction and the service has lost ground to other solutions such as Flipboard and Zite.

Digg’s history of more than 350 million “diggs” and 28 million story submissions, combined with the knowledge that Bitly has from its database of shared links, could help power a new recommendation engine within News.me — or at least that seems to be the hope. In a comment that Matt Williams posted to the Digg blog, Kevin Rose said of Borthwick:

John understands the real-time nature of the web and how to capture and surface trends as they occur. Given his experience with bit.ly, news.me, and Chartbeat I can’t wait to see what he does with Digg.

Rose left the site last year to start his own startup incubator called Milk, which released a single mobile-sharing app called Oink and then abruptly closed its doors, and Rose later joined Google’s financing arm, Google Ventures. Matt Williams tried to fix what was left of Digg, and there were reports that traffic had started to recover somewhat (it still has 7 million unique visitors a month), but then the entire development team left en masse to join WaPo Labs and it became obvious that Digg was no more.

At one point, Digg reportedly got an acquisition offer from Google of $200 million, but turned it down to focus on building the site as a standalone service. During its heyday — when websites used to talk about “the Digg effect” taking down their servers with a rush of traffic — it raised a total of $45 million in financing from venture investors such as LinkedIn founder Reid Hoffman and Andreessen Horowitz, all of whom will presumbly write the investment off as a difficult lesson in the vagaries of the social web.